What Housing Loan Type Should You Choose?

Perhaps one of the scariest stages of homebuying in the Philippines is applying for a home loan. Aside from worrying about getting a loan approval from banks or other lending institutions to fund your home purchase, there is also that concern of being able to commit with the loan payments and finish paying off the actual property for sale.

But what if the secret to being able to keep up with mortgage payments is being able to determine at the onset what type of mortgage is really best for your lifestyle?

Get acquainted with these three basic types of mortgages to determine which one’s best for you:

1. Fixed-Rate

Choose this if

… you plan to stick with your mortgage payment budget for a very long time. This loan type is the most ideal because the interest rate on your loan amount remains the same over the entire length of your loan term. As such, your monthly payments are already determined beforehand and that monthly payments remain the same over time until the end of your loan term.

Not ideal if

… you are planning to build home equity on your condo, house and lot or townhouse. Home equity is the value of your home ownership, which is determined by the property’s market value at time of assessment minus your current mortgage balance. This can be then converted into cash if you need to fund a major expense, like tuition, travel fund, or hospitalization.

In a fixed-rate loan, most of your loan payments will go towards paying off the interest, with a small portion going to the principal, which you need to build home equity.

Make this loan work for you

A long-term fixed-rate loan (say 15 to 30 years) will only require you to pay a lower amortization payment per month, as compared to payments on other housing loan types.

If you have extra money (e.g. bonuses, 13th month pay, freelancing income), you can overpay your amortization payments so that excess money will go towards paying off the principal amount.

2. Hybrid (Adjustable and Fixed Rates)

Choose this if

… you are buying a condo or townhouse as an investment you can rent, flip, or sell back to the real estate market. Because the rates are lower, you can use the savings to splurge a little and purchase a real estate property that’s a bit higher than your personal budget and preference. If the interest rates do decrease within the loan term, you get to save more on your loan payments and reinvest them back as home improvements.

Not ideal if

… you are planning to use the property as your primary residence for more than five years. After the fixed-rate period ends, your succeeding loan payments will be based on interest rates, which are subject to change yearly. Even if there’s an interest cap, the unpredictability doesn’t offer financial protection, especially if there’s inflation.

Make this loan work for you

A hybrid loan with a shorter adjustment rate period will reduce your chances to paying loan payments on higher interest rates in the future. For example, a six percent hybrid loan can end up at 11 percent in just three years if rates rise sharply.

It also helps to allot a contingency fund to cover this types of expense as well. If you don’t have one, you can charge this expense from your monthly rental or lease income as rental overhead.

3. Flexi-Term

Choose this if

… you need an extra layer of financial protection. This type of loan can either be on a fixed-interest rate or a hybrid scheme. This is perfect for starter families or retirees who are unable to anticipate when major expenses would happen in the future.

Security Bank’s Fantastic Elastic Home Loan, for example, allows their borrowers to advance up to 25 percent of their monthly payment to cover the instances in their loan term where they would be making underpayments at no extra charge. Borrowers who also availed this type of loan get to skip one amortization payment every year.

Not ideal if

… you are not fully committed to buying a home yet. Although flexi-term loans offer a very comfortable safety net, this should not be the very reason why you should buy a home. True financial freedom is being able to buy a home without sacrificing your current lifestyle, so it pays to be smart and confident not only with your property preference, but with how you intend to pay for it.

Make this loan work for you

If you intend to get a flexi-term loan, go for a reducing balance scheme in a three-year repricing option so you can save interest payments. If you have built enough equity and will expect financial difficulty in the future, you can opt for a refinancing scheme to reduce loan payments and free up extra cash you need for your household.